FHA Down Payment Assistance: How Do I Qualify?

Taking out an FHA loan can help borrowers achieve homeownership when they may not be able to qualify for other programs. But FHA still requires 3.5% down.

For hopeful homeowners unable to come up with these funds, there may be a solution: FHA down payment assistance can reduce the amount of cash necessary to buy a home.

Key Takeaways

• Down payment assistance is available for FHA loans, but you’ll need to apply to programs separately from your mortgage.

• DPA programs are typically offered by government agencies, including on the state, county, and municipal levels, as well as nonprofit organizations.

• FHA down payment assistance can be in the form of a grant or loan. Grants do not require repayment, and loans may be forgivable, have no monthly payments, or have payments like a regular mortgage.

• Down payment assistance programs have their own requirements, with some only available to first-time homebuyers and lower-income applicants.

What is FHA Down Payment Assistance?

FHA down payment assistance (DPA) is funds provided to help cover the down payment requirement and closing costs associated with FHA-backed mortgages.

Assistance does not come directly from the Federal Housing Administration. Instead, DPA is offered through localized organizations and government agencies across the country.

The amount offered by different down payment assistance programs will vary. Sometimes, programs provide a set percentage of your purchase price, such as 3.5% or 5%. In other cases, you may be offered a fixed sum, such as $7,500 or $20,000.

For Example: You plan to use an FHA mortgage to purchase a home for $250,000. Since FHA loans require a 3.5% down payment, you will need to come up with $8,750 to put down. You must also pay closing costs estimated 2-4% of the loan. Assume $10,000 for this example. This totals $18,750, which you will need when you close the loan.

To ease this burden, you apply and qualify for a down payment assistance loan of $15,000. These funds will cover your entire down payment and require you to come out of pocket for just $3,750 of your closing costs.

Keep in mind that not all FHA lenders will accept all types of down payment assistance. If you’re planning to use DPA with your purchase, make sure to tell your lender upfront.

How Much FHA Down Payment Assistance Can I Get?

It’s possible to qualify for more than one FHA down payment assistance program and stack the funds. In some cases, you may even be able to close with no money out of pocket, with multiple DPA programs covering your full down payment and closing costs.

With conventional loans, you’re typically allowed to borrow up to 105% of your property’s appraised value when using DPA. While this is almost always sufficient to cover closing costs, there is technically no limit when using FHA loan down payment assistance.

FHA guidelines state that the program has “no maximum Combined Loan-to-Value (CLTV) for secondary financing loans” issued by approved DPA sources.

Note: You can’t receive cash back at closing from excess down payment assistance funds, but the FHA does allow you to recoup your earnest money deposit and other related costs that you paid for outside of closing.

Where to Get FHA Down Payment Assistance

As mentioned, down payment assistance is not offered directly through the FHA. Instead, you'll find programs from government agencies and nonprofit organizations. These programs are often localized on the state, county, or municipal level, including through Native American tribes.

State Housing Finance Agencies

One of the simplest places to find FHA down payment assistance is from your State Housing Finance Agency (SHFA). These programs are typically available throughout the state, although some DPA options may have other geographical restrictions.

• The California Housing Finance Agency offers the MyHome Assistance Program, with FHA DPA for up to 3.5% of your purchase price or appraised value.

• The Texas State Affordable Housing Corporation offers the Home Sweet Texas Home Loan Program, with down payment assistance of up to 5% on FHA loans.

• The Florida Housing Finance Corporation offers the Florida Assist and Florida Homeownership Loan Programs, providing up to $10,000 in FHA assistance. There is also a forgivable loan program for 3% to 5% of your property's value.

Be warned, however, that these SHFA programs often require you to work with one of their approved lenders. This can limit your ability to shop around and potentially lead to higher rates on your loan.

County and Municipal Agencies

Down payment assistance programs for FHA loans are often hyper-localized to promote homeownership within specific areas and communities. One of the most common places to find FHA DPA is from the local or county government where the home you’re purchasing is located.

• The Chicago Housing Authority offers the Down Payment Assistance Program, providing as much as $20,000 in grant funds.

• The Arlington County (VA) Housing Division offers the Moderate-Income Purchase Assistance Program, providing an FHA DPA loan for up to 25% of a property's purchase price.

Nonprofit Organizations

You can also find FHA loan down payment assistance from nonprofits within your community. These may be small, localized charities or nationwide groups with individual chapters around the country, including churches and other religious organizations.

Native American Tribal Agencies

Homebuyers who are members of one of the federally recognized Native American tribes may qualify for special FHA down payment assistance programs through related tribal agencies.

Other Sources of FHA Down Payment Assistance

There are other places to find down payment assistance for your FHA mortgage, including your employer or the lender you're using for your loan. These programs may be less likely to have restrictions than other FHA DPA options. However, FHA lending guidelines limit the amount of second mortgages you can receive from non-governmental or charitable sources.

The total amount you borrow, including your FHA loan and down payment assistance from these sources, cannot exceed 96.5% of your property's value. This means that you can use these types of DPA to reduce the size of your first mortgage but would still need to come up with at least 3.5% of your purchase price and take care of closing costs.

In some cases, however, you may be able to receive a cash grant with no expectation of repayment from your employer or other assistance provider that qualifies to cover your down payment and closing costs.

How Does FHA Loan Down Payment Assistance Work?

Getting FHA loan down payment assistance takes a little more effort than a normal purchase, but the benefits can far outweigh the time spent – especially for prospective buyers who would otherwise not be able to afford a home.

1. Apply for FHA Down Payment Assistance

The first step in purchasing a home with FHA down payment assistance is to find and apply to DPA programs serving the area you're purchasing in. Each program will have its own criteria for qualifying applicants, and waiting for approval can sometimes be a drawn-out process.

Applying for DPA is similar to applying for a mortgage in that you'll generally need to provide income documentation and meet minimum credit requirements.

While it doesn't hurt to get in touch with an FHA lender before applying for assistance – they may even be able to point you toward programs available in your community – it's possible preapproval could expire or be nearing expiration by the time you secure your DPA.

2. Get Preapproved for an FHA Loan

Getting preapproved by an FHA lender will give you an accurate idea of how much home you can buy, what interest rate you might qualify for, and how large of payments you could expect to have.

Preapproval may not be as detailed as the complete FHA approval process and doesn't guarantee a mortgage. Still, it does show real estate agents and sellers that you're serious about buying and have undergone vetting by a lender. In some cases, lenders may even do a fully underwritten preapproval, which can reduce the time needed for underwriting once you find your home.

3. Get a Home Under Contract

After getting preapproved for an FHA loan, the next step is to find a home you would like to buy and get it under contract. This typically involves working with a real estate agent to write an offer on a house. Once the seller accepts your offer, the property is "under contract," and you can proceed with the lending process.

4. Complete Underwriting With Your FHA Lender

Once you have a home under contract, your FHA lender can go ahead with the full underwriting of your loan. Depending on the comprehensiveness of your preapproval, you may or may not need to submit more documentation at this stage.

However, you will need to have a home appraisal completed to ensure that the property is in acceptable condition and its value aligns with the amount you offered.

5. Close On Your New Home

If your appraisal supports your purchase price and no other problems arise during underwriting, the next and final step is to close on your new home. This is when you'll need the funds for your down payment and closing costs.

If you've qualified for any FHA down payment assistance programs, the award amount will be credited to you at closing and serve to reduce the total you'll need to bring to the table.

FHA Down Payment Assistance Requirements

What exactly does it take to qualify for DPA? Let's examine some of the FHA down payment assistance requirements.

Credit Score: Qualifying for an FHA loan typically requires a credit score of at least 580. However, qualifying for FHA down payment assistance may require slightly higher scores. While many programs keep their minimums in line with FHA standards, it's not uncommon to see score requirements of 620 or 640.

First-Time Homebuyer: You don’t need to be a first-time homebuyer to qualify for an FHA mortgage, but many down payment assistance programs for FHA loans may have that requirement. According to the Urban Institute, 62.1% of DPA programs are only open to first-time homebuyers.

The good news? Even if you’ve owned a home in the past, you may qualify as a first-time homebuyer if you haven’t held title to property within the past three years.

Income Limits: Since FHA down payment assistance programs are designed to help buyers struggling to come up with down payment and closing costs, you'll typically find income limits on most types of DPA. Urban Institute data shows that 72.7% of programs have limits, generally expressed in terms of your area's median income.

Debt-to-Income Ratio: Qualifying for an FHA mortgage requires a debt-to-income (DTI) ratio of 50% or lower, although some lenders may have stricter requirements.

Obtaining down payment or closing cost assistance for an FHA loan is no different, with many providers having DTI requirements that may vary from your lender. Sometimes, you might need a debt-to-income ratio of 43% or below to qualify for some DPA options.

Types of FHA Down Payment Assistance Programs

FHA down payment assistance providers may offer prospective homeowners more than one type of program. These programs might have different qualification requirements, offer different amounts of funding, or have different repayment terms.

Grants

Grants are the most desirable type of FHA loan down payment assistance and, as such, can be the most difficult to obtain. They are essentially free money that does not have to be repaid. Grants generally have stringent requirements and limited availability.

Forgivable Loans

Forgivable loans are a type of DPA designed to encourage homebuyers to stay in their homes and promote stability within the community. Qualifying for a forgivable loan creates a second lien on your home that is forgiven once you’ve lived there for a certain amount of time, often five to ten years.

Sometimes, forgivable DPA loans may erase a portion of your debt after each year of home ownership, such as a five-year loan eliminating 20% of the balance annually.

Silent Second Mortgages

FHA down payment assistance in the form of a silent second mortgage encumbers your property with a lien but does not require you to make any payments while you live in the house and have your primary mortgage. These silent second loans typically only come due once you sell your home, move, or refinance your first loan.

Second Mortgages

Some down payment assistance programs come as fully amortizing second mortgages that require monthly principal and interest payments alongside your primary loan. While this can be an accessible type of DPA for borrowers who do not qualify for other programs, be aware that the monthly payments will likely count against your debt-to-income ratio.

Applying for FHA Down Payment Assistance

Homebuyers planning to obtain an FHA mortgage usually need a 3.5% down payment, but this requirement can often be covered by qualifying for FHA down payment assistance. Borrowers can receive funds from government agencies and nonprofits to cover some or all of their down payment and closing costs.

Still figuring out where to start your search for down payment assistance? One option is to apply with an FHA lender serving your community. These mortgage professionals deal with FHA down payment assistance regularly and can likely point you toward options available in your local area.